Ohio’s ability to tax receipts under the Ohio commercial activity tax (“CAT”) in the case of nationwide contracts that license the right to use intellectual property has now been significantly limited. The Ohio Supreme Court has held that the Department of Taxation (“Department”) may not source NASCAR’s broadcast and licensing revenues under the CAT using estimates based on Ohio television viewership or Ohio’s percentage of the U.S. population. NASCAR Holdings, Inc. v. McClain, Slip Opinion No 2022-Ohio-4131 (Ohio Supreme Ct., Nov. 22, 2022). In ruling for NASCAR, the Court concluded that under the specific language of the CAT sourcing statute, NASCAR’s revenues from its licensing of intellectual property could not be “sitused” to Ohio.

The Facts: NASCAR Holdings, Inc. (“NASCAR”) sanctions auto races throughout the United States and abroad. It is headquartered in Daytona Beach, Florida, and during the tax years 2005 through 2010 held only seven racing events in Ohio. NASCAR maintained no permanent offices, owned no tangible property, and employed no permanent workers in the state. As a result, NASCAR never registered for the CAT and the Department commenced a CAT audit of NASCAR’s revenue streams.

NASCAR earned broadcast revenues by selling to FOX Broadcasting the right to broadcast races in the United States and in certain foreign countries in exchange for a fixed fee. It also earned media revenue by licensing the right to use its brand in marketing efforts and to operate its website worldwide, also for a fixed fee. In addition, NASCAR licensed its trademark and trade name anywhere in the United States and Canada, in exchange for licensing fees that were based on a percentage of net sales of licensed products anywhere.

The Department sourced NASCAR’s broadcast and media revenues to Ohio using Nielsen Ratings, and sourced its license fees using U.S. Census data. NASCAR claimed that these revenues should be sourced to Florida, its commercial domicile.

The Board of Tax Appeals upheld the Department’s use of ratings and Census data, on the grounds that the underlying contracts conferred “the right to use the intellectual property” in Ohio. NASCAR appealed to the Ohio Supreme Court.

The Ohio CAT applies to gross receipts “sitused” to the state. For receipts from intellectual property, there are two alternative sourcing rules: (1) receipts from the right to use intellectual property are “sitused” to Ohio “to the extent the receipts are based on the amount of use of the property in [Ohio];” or (2) if the receipts are not based on the amount of use of the property, but instead on the “right to use the property,” they are “sitused” to Ohio only “to the extent the receipts are based on the right to use the property in [Ohio].” R.C. § 5751.033(F). This distinction was critical to the Court’s reversal in favor of NASCAR.

The Decision: Although NASCAR raised both a statutory and a dormant Commerce Clause challenge, the Court first addressed the statutory argument and never reached the constitutional challenge. It agreed with NASCAR that the contractual right for FOX to use broadcast rights in a territory that includes Ohio did not mean the revenues were “based on the right to use” the intellectual property in Ohio. Since NASCAR received a fixed fee whether or not any part of its intellectual property was used by FOX in Ohio, no part of the fee could be sitused to Ohio under alternative (2) above. The same result was reached for NASCAR’s fixed media revenues.

As for NASCAR’s licensing fees, which were not fixed, the Court noted that the Department had also erroneously sourced the fees based on Census data because of the licensee’s “right to use” NASCAR’s marks, the same statutory situsing alternative as for the other revenue streams. The Court rejected the partial dissent’s conclusion that the first situsing rule was actually triggered, pointing out that this was not the position relied on by the Department in its assessment.

The decision shows that courts often prefer to decide cases based on the actual statutory language, and only reach constitutional arguments where necessary. According to the Court, if the Department believes the statutory language fails to reflect market state principles underlying the CAT, it “is free to take up that matter with the legislature."

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